final report - european banking authority...final report on draft rts on instruments and alternative...

EBA/RTS/2021/01

21/01/2021

Final report

Draft Regulatory Technical Standards

on classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration

FINAL REPORT ON DRAFT RTS ON INSTRUMENTS AND ALTERNATIVE ARRANGEMENTS FOR THE PURPOSES OF INVESTMENT FIRM’S REMUNERATION

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Contents

1. Executive summary 3

2. Background and rationale 5

3. Draft regulatory technical standards 9

3.1 Draft cost-benefit analysis / impact assessment 23


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1. Executive summary

Directive (EU) 2019/20341 (IFD) sets out requirements for the remuneration of staff whose professional

activities have a material impact on the risk profile of the investment firm or of the assets that it manages

(identified staff) that apply from 26 June 2021. Currently, such staff are subject to similar provisions

under Directive 2013/36/EU2 (CRD).

Article 32(1)(j) of the IFD provides that at least 50% of the variable remuneration consists of certain

instruments, including (iii) Additional Tier 1 instruments or Tier 2 instruments or Other Instruments

which can be fully converted to Common Equity Tier 1 instruments or written down, and that adequately

reflect the credit quality of the investment firm as a going concern.

Article 32(1)(k) of the IFD provides that by way of derogation from point (j), where an investment firm

does not issue any of the instruments referred to in that point, competent authorities may approve the

use of alternative arrangements fulfilling the same objectives.

Article 32(8) of Directive (EU) 2019/2034 mandates the EBA, in consultation with ESMA, to develop draft

regulatory technical standards to specify the instruments under point (j)(iii) of paragraph (1) of this

Article and possible alternative arrangements for the pay out of variable remuneration.

The IFD refers to the requirements included in Regulation (EU) No 575/20133 (CRR) regarding AT 1 and

Tier 2 instruments. The draft RTS introduce requirements for investment firms for AT 1, Tier 2 and Other

Instruments used for the purposes of variable remuneration, to ensure that they appropriately reflect

the credit quality of the investment firm, and define for Tier 2 and Other Instruments the write-down,

write-up and conversion mechanisms. For AT 1 instruments, these mechanisms are defined by the CRR.

The provisions in the RTS are aligned with Commission Delegated Regulation 527/20144 (Regulatory

Technical Standards (RTS) on classes of instruments that are appropriate to be used for the purposes of

variable remuneration under CRD) to ensure that, in particular, groups of credit institutions and

investment firms are able to use a common set of instruments for remuneration purposes.

The draft RTS set out requirements to ensure that the credit quality of investment firms is reflected in

the instruments and that these instruments are appropriate for the purposes of variable remuneration.

The link to credit quality as a going concern is established by introducing uniform minimum trigger

events for write-down and conversion of AT 1, Tier 2 and Other Instruments. To ensure that different

1 Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU 2 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC 3 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 4 COMMISSION DELEGATED REGULATION (EU) No 527/2014 of 12 March 2014 supplementing Directive (EU) No 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the classes of instruments that adequately reflect the credit quality of an institution as a going concern and are appropriate to be used for the purposes of variable remuneration


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classes of instruments are appropriate for the purposes of variable remuneration, these instruments

should provide appropriate incentives for staff to be prudent and long term oriented in their risk-taking.

The EBA has reviewed the draft RTS after three month of public consultation and has now submitted as

mandated the draft RTS to the Commission for adoption.


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2. Background and rationale

2.1 The nature of RTS under EU law

1. These draft RTS are produced in accordance with Article 10 of Regulation (EU) No 1093/2010 of

24 November 2010 (the EBA Regulation) as amended. Paragraph 4 of that same Article provides

that the RTS shall be adopted by means of an EU Regulation or Decision.

2. In accordance with EU law, EU regulations are binding in their entirety and directly applicable in

all Member States. This means that, on the date of their entry into force, EU Regulations become

part of the national law of the Member States and that their implementation into national law

is not only unnecessary but also prohibited by EU law, except insofar as this is expressly required

by the regulations.

2.2 Legal basis and background

3. After the financial crisis, the EU co-legislator has put in place a legal framework under Directives

2010/76/EU and 2013/36/EU for identified staff, i.e. staff that have a material impact on the

institution’s risk profile. This framework aimed at ensuring that the variable remuneration of

identified staff is aligned with the institution’s risk profile in the longer-term and applied to

credit institutions and investment firms.

4. Considering the differences between credit institutions and investment firms a specific

remuneration framework for investment firms has been established for those firms that are

subject to Directive (EU) 2019/20345 (IFD). Small and non-interconnected investment firms that

meet all the conditions of Article 12(1) of Regulation (EU) 2019/2033 (IFR)6 are not subject to

the specific remuneration framework under the IFD, but have still to comply with the

remuneration requirements of Directive 2014/65/EU 7 that sets out requirements on the

remuneration of sales staff.

5. The IFD sets out a framework for remuneration policies for investment firms that has been

construed as referring to the corresponding provisions in Directive 2013/36/EU8. The provisions

5 Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU 6 Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 7 DIRECTIVE 2014/65/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU 8 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 as amended on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC Text with EEA relevance


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should ensure that the remuneration of staff members who have a material impact on the

investment firm’s risk profile or on the assets that it manages is aligned with its risk profile.

6. While ensuring a level playing field, the IFD takes into account the differences between credit

institutions and investment firms and offers some flexibility to investment firms in the way they

use non-cash instruments when paying variable remuneration, as long as such instruments are

effective in achieving the objective of aligning the interest of staff with the interest of various

stakeholders, such as shareholders, creditors and clients and contribute to the alignment of

variable remuneration with the risk profile of the investment firm. These conditions and the

present draft RTS ensure that non-cash instruments are appropriate to be used for the purposes

of variable remuneration.

7. Article 32(1)(j) of the IFD requires that at least 50% of ‘the variable remuneration of staff

members who have a material impact on the investment firm’s risk profile or on the assets that

it manages consists of any of the following instruments: (i) shares, or subject to the legal

structure of the investment firm concerned, equivalent ownership interests; (ii) share-linked

instruments, or subject to the legal structure of the investment firm concerned, equivalent non-

cash instruments; (iii) additional Tier 1 instruments or Tier 2 instruments or Other Instruments

which can be fully converted to Common Equity Tier 1 instruments or written down and that

adequately reflect the credit quality of the investment firm as a going concern; (iv) non-cash

instruments which reflect the instruments of the portfolios managed.

8. Article 32(1)(k) determines that by way of derogation from point (j), where an investment firm

does not issue any of the instruments referred to in that point, national competent authorities

may approve the use of alternative arrangements fulfilling the same objectives.

9. Article 32(3) of the IFD determines ‘that Member States or their competent authorities may

place restrictions on the types and designs of those instruments or prohibit the use of certain

instruments for variable remuneration.’

10. Article 32(8) of the IFD sets out that the EBA, in consultation with ESMA, shall develop draft

regulatory technical standards to specify the classes of instruments that satisfy the conditions

set out in paragraph 1(j)(iii) as well as to specify possible alternative arrangements set out in

paragraph 1(k).

11. The IFD allows investment firms to use a wide set of instruments for the pay out of variable

remuneration. The purpose of the draft RTS is to specify a subset of those instruments, namely

classes of additional Tier 1, Tier 2 and Other Instruments that are appropriate to be used for

variable remuneration as well as to specify possible alternative arrangements for the pay out of

variable remuneration where investment firms do not issue any of the instruments referred to

in Article 32(1)(j) of the IFD.

12. The EBA has conducted an impact assessment of costs and benefits caused by the provisions

contained in these draft RTS. The EBA came to the conclusion that the additional costs caused

by these draft RTS are very limited, as the draft RTS are closely aligned with the existing


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framework. The possibility for certain investment firms to use alternative arrangements is aimed

at reducing the regulatory burden for those firms, which do not issue any of the instruments

included in Article 32(1)(j) of the IFD. The setting up of alternative arrangements will trigger one

off costs that are very limited as they do not require the issuance of any financial instruments.

2.3 Regulatory approach within the RTS

13. The EBA has taken the existing remuneration framework established under Directive

2013/36/EU and Commission Delegated Regulation 527/20149 into account when developing

the draft RTS. The existing framework takes into account market practices for own funds

instruments and aims to ensure that already existing types of instruments can be used when

they meet certain additional conditions that ensure that such issuances are appropriate for the

purpose of variable remuneration.

14. Regarding the classes of additional Tier 1 (AT 1), Tier 2 and Other Instruments that are

appropriate to be used for variable remuneration, the Commission has already adopted the

aforementioned Delegated Regulation specifying the classes of such instruments that meet the

conditions of Article 94(1)(l)(ii) of Directive 2013/36/EU.

15. The conditions for such instruments under the IFD are equal to the conditions set out in Directive

2013/36/EU and therefore the classes of instruments that satisfy the conditions under Article

32(1)(j)(iii) of the IFD should be equivalent to the classes of instruments specified in Commission

Delegated Regulation 527/2014, but should also take into account the need for increased

flexibility of investment firms. This additional flexibility has to a large extent already been

provided for in paragraphs 4 and 5 of the same Article that allows limitations in the application

of the requirement to pay out variable remuneration to certain investment firms and staff.

Moreover, investment firms that do not issue instruments are allowed to use alternative

arrangements to pay out variable remuneration.

16. Variable remuneration awarded in instruments is intended to promote sound and effective risk

management and should not encourage risk-taking that exceeds the level of tolerated risk within

the investment firm. Receiving a part of the variable remuneration in instruments or via

alternative arrangements should provide incentives for staff to act in the long-term interest of

the investment firm.

17. The price or value of instruments awarded as variable remuneration should reflect changes in

the credit quality of the firm, in particular if it deteriorates, to ensure that instruments awarded

to staff participate in potential losses that have an adverse effect on credit quality as a going

concern. This link provides incentives for prudent and long term oriented risk-taking. Credit

quality may be measured by different means, e.g. using a rating, spreads or capital ratios.

9 COMMISSION DELEGATED REGULATION (EU) No 527/2014 of 12 March 2014 supplementing Directive (EU) No 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the classes of instruments that adequately reflect the credit quality of an institution as a going concern and are appropriate to be used for the purposes of variable remuneration


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18. The qualification that the instrument shall reflect the credit quality of the investment firm as a

going concern makes it necessary to introduce measures that ensure that the value of the

instruments is not reduced only at the time when an investment firm is resolved or at the point

of non-viability. Therefore, the trigger level for investment firms at which write-off or conversion

takes place is set above the regulatory minimum requirements to ensure that the instruments

are suitable for the purposes of variable remuneration.

19. To ensure that a reliable measure exists for all investment firms without creating costs for

additional rating processes and to ensure a close alignment with the framework applicable to

credit institutions, including on a consolidated basis, the CET 1 capital ratio was chosen as an

indicator for the credit quality as a going concern and the same trigger level has been set.

20. The IFD provisions for variable remuneration require deferral and retention periods and state,

among other requirements, that variable remuneration is not paid through vehicles or methods

that facilitate non-compliance with the requirements. Consequently, the conditions of

instruments need to ensure a sufficiently long maturity to account for deferral and retention

periods and to be at market rates to avoid situations in which overly high distributions

jeopardise the ability of investment firms to strengthen their capital bases or that would

circumvent limits set for the variable components of remuneration in the investment firm’s

remuneration policy or weaken the risk alignment. This is achieved by a cap on the distributions

or through the requirement to issue significant parts of any issuance to other investors. To

ensure a level playing field, the requirements of the draft RTS have been aligned with the

framework applicable to credit institutions.

21. Where an investment firm does not issue any of the instruments referred to in Article 32(1)(j),

national competent authorities may approve the use of alternative arrangements fulfilling the

same objectives. The draft RTS specify possible alternative arrangements that should ensure

that the variable remuneration received by staff members who have a material impact on the

investment firm’s risk profile or on the assets that it manages is aligned with its risk profile.

22. To achieve this objective it is necessary to create conditions that ensure that the value of the

variable remuneration received under alternative arrangements is reduced when risks cause an

adverse effect on the performance of the investment firm or managed assets, or that such

arrangements could be converted into CET1 capital. Such arrangements should allow the

deferral and retention of variable remuneration received, so that compliance with other

requirements for variable remuneration is ensured.


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3. Draft regulatory technical standards

COMMISSION DELEGATED REGULATION (EU) No …/..

of [date]

on classes of instruments that adequately reflect the credit quality of the

investment firm as a going concern and possible alternative arrangements

that are appropriate to be used for the purposes of variable remuneration

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Directive (EU) 2019/2034 of the European Parliament and of the Council of 27

November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC,

2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU, and in particular Article 32 (8)

thereof,

Whereas:

(1) Directive (EU) 2019/2034 regarding the governance and remuneration provisions

applicable to investment firms has been construed as referring to the corresponding

provisions in Directive 2013/36/EU to ensure that governance and remuneration

provisions applicable to investment firms benefit from the well established meaning of

these concepts under Directive 2013/36/EU. Against this background, and also with a

view to ensure a level playing field between credit insitutions and investment firms, this

Regulation should be inspired by and as far as possible aligned with Commission

Delegated Regulatiuon 527/2014 that specifies the classes of instruments that are

appropriate to be used under Directive 2013/36/EU. This Regulation should also provide

appropriate flexibility to investment firms regarding the use of different types of non-

cash instruments or of alternative arrangements when paying variable remuneration as

long as such instruments are effective in achieving the objective of aligning the interest

of staff with the interest of various stakeholders, such as shareholders, creditors and

clients, and contribute to the alignment of variable remuneration with the risk profile of

the investment firm.

(2) Investment firms have been subject to Commission Delegated Regulation 527/2014 that

specifies the additional Tier 1, Tier 2 and Other Instruments, of which the substancial

portion of variable remuneration to be paid out in instruments under Article 94(1)(l) of

Directive 2013/36/EU should consist. Those instruments are included also in point (j)(iii)


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of Article 32(1)of Directive (EU) 2019/2034. Investment firms should be able to continue

to use those instruments that comply with Commission Delegated Regulation 527/2014

under the present Commission Delegated Regulation.

(3) Variable remuneration awarded in instruments should promote sound and effective risk

management and should not encourage risk-taking that exceeds the level of risk appetite

of the investment firm. Therefore, classes of instruments which can be used for the

purposes of variable remuneration should align the interests of staff with the longer-term

interests of the investment firm, its shareholders, creditors, clients and other stakeholders

by providing incentives for staff to act in the longer-term interest of the investment firm.

(4) Directive (EU) 2019/2034 allows investment firms to use a wide set of instruments for

the pay out of variable remuneration. In order to ensure that there is a strong link to the

credit quality of an investment firm as a going concern, additional Tier 1, Tier 2 and Other

Instruments used for the purposes of variable remuneration should contain appropriate

trigger events for write down or conversion which reduce the value of the instruments in

situations where the credit quality of the investment firm as a going concern has

deteriorated. The trigger events used for remuneration purposes should not change the

level of subordination of the instruments and therefore should not lead to a

disqualification of Additional Tier 1 or Tier 2 instruments as own funds instruments.

(5) While the conditions which apply to Additional Tier 1 and Tier 2 instruments are

specified in Article 9 of Regulation (EU) 2019/203310 in conjunction with Chapter 3 and

4 of Title 1 of Part Two of Regulation (EU) No 575/2013, the Other Instruments referred

to in point (j)(iii) of Article 32(1) of Directive (EU) 2019/2034, which can be fully

converted to Common Equity Tier 1 instruments or written down, are not subject to

specific conditions pursuant to that Regulation as they are not classified as own funds

instruments for prudential purposes. Specific requirements should therefore be set for

different classes of instruments to ensure that they are appropriate to be used for the

purposes of variable remuneration, taking account of the different nature of the

instruments. The use of instruments for the purposes of variable remuneration should not

in itself prevent instruments from qualifying as own funds of an investment firm as long

as the conditions laid down in Regulation (EU) 2019/2033 are met. Nor should such use

in itself be understood as providing an incentive to redeem the instrument, as after

deferral and retention periods staff members are, in general, able to receive liquid funds

by other means than redemption.

(6) Other Instruments should not be limited to financial instruments as defined in point 15 of

Article 4(1) of Regulation (EU) No 2019/2033 and allow for the use of other contractual

arrangements between staff members and investment firms to reduce the administrative

burden for the creation of such instruments. To ensure that Other Instruments reflect the

credit quality of an investment firm as a going concern, appropriate requirements should

ensure that such instruments are written down or converted before an investment firm

fails to meet its own funds requirements.

(7) When instruments used for the purposes of variable remuneration are called, redeemed,

repurchased or converted, in general such transactions should not increase the value of

10 Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014


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the remuneration awarded by paying out amounts that are higher than the value of the

instrument or by converting into instruments which have a higher value than the

instrument initially awarded. The replacement of instruments at the same value should

ensure that remuneration is not paid through vehicles or methods that facilitate non-

compliance with Directive (EU) 2019/2034 or Regulation (EU) 2019/2033.

(8) When awarding variable remuneration and when instruments used for variable

remuneration are redeemed, called, repurchased or converted, those transactions should

be based on values that have been established in accordance with the applicable

accounting standard at the point of time of the transaction to ensure that the correct

amount of variable remuneration is awarded and not unduly altered when the instrument

is redeemed, called, repurchased or converted.

(9) Article 54 of Regulation (EU) No 575/2013 sets out the write-down and conversion

mechanisms for Additional Tier 1 instruments. Additionally, point (j)(iii) of Article 32(1)

of Directive (EU) 2019/2034 requires that Other Instruments can be fully converted into

Common Equity Tier 1 instruments or written down. As the economic outcome of a

conversion or write-down of Other Instruments is the same as for Additional Tier 1

instruments, write-down or conversion mechanisms for Other Instruments should take

into account the mechanisms that apply to Additional Tier 1 instruments, with adaptations

to take account of the fact that Other Instruments do not qualify as own fund instruments

from a prudential perspective. Tier 2 instruments are not subject to regulatory

requirements regarding write-down and conversion under Regulation (EU) No 575/2013.

To ensure that the value of all such instruments, when used for variable remuneration, is

reduced when the credit quality of the investment firm deteriorates, the situations in

which a write-down or conversion of the instrument is necessary should be specified. The

write down, write up and conversion mechanisms for Tier 2 and Other Instruments should

be specified to ensure consistent application.

(10) Distributions arising from instruments can take various forms. They can be variable or

fixed and can be paid periodically or at the final maturity of an instrument. In order to

promote sound and effective risk management no distributions should be paid to staff

during deferral periods. Staff members should only receive the distributions in respect of

periods which follow the vesting of the instrument, after which staff becomes the legal

owner of the instrument. Therefore, only instruments with distributions which are paid

periodically to the owner of the instrument are appropriate for use as variable

remuneration; zero coupon bonds or instruments which retain earnings should not count

towards the portion of remuneration which must consist of any of the instruments referred

to in point (j) of Article 32(1) of Directive (EU) 2019/2034. This is because staff would

benefit during the deferral period from increasing values, which can be understood as

equivalent to receiving distributions.

(11) Very high distributions can reduce the long-term incentive for prudent risk-taking as they

effectively increase the variable part of the remuneration. In particular, distributions

should not be paid out at intervals of longer than one year, as this would lead to

distributions effectively accumulating during deferral periods and being paid out once the

variable remuneration vests. Accumulation of distributions would circumvent the

principle in paragraph 3 of Article 32 that remuneration payable under deferral

arrangements vests no faster than on a pro rata basis. Point (b) of Article 32(2) of


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Directive (EU) 2019/2034 requires that variable remuneration shall not be paid through

financial vehicles or methods that facilitate the non-compliance with this Directive or

Regulation (EU) 2019/2033. Therefore, distributions made after the instrument has

vested should not exceed market rates for such instruments issued by other investment

firms or institutions of comparable credit quality. This should be ensured by requiring

instruments used for variable remuneration, or the instruments to which they are linked,

to be issued mainly to other investors, or by requiring such instruments to be subject to a

cap on distributions.

(12) Deferral and retention requirements which apply to awards of variable remuneration

pursuant to point (l) of Article 32(1) and Article 32(3) of Directive (EU) 2019/2034 have

to be met at all relevant times, including when instruments used for variable remuneration

are called, redeemed, repurchased or converted. In such situations, instruments should

therefore be replaced with Additional Tier 1, Tier 2 and Other Instruments which reflect

the credit quality of the investment firm as a going concern, have features equivalent to

those of the instrument initially awarded, and are of the same value, taking into account

any amounts which have been written down. Where instruments other than Additional

Tier 1 instruments have a fixed maturity date, minimum requirements should be set for

the remaining maturity of such instruments when they are awarded in order to ensure that

they are consistent with requirements regarding the deferral and retention periods for

variable remuneration.

(13) Directive (EU) 2019/2034 does not limit the classes of instruments that can be used for

variable remuneration to a specific class of financial instruments. It should be possible to

use synthetic instruments or contracts between staff members and investment firms which

are linked to Additional Tier 1 and Tier 2 instruments which can be fully converted or

written down. This allows for the introduction of specific conditions in the terms of such

instruments which apply only to instruments awarded to staff, without the need to impose

such conditions on other investors.

(14) In a group context, issuances may be managed centrally within a parent undertaking; this

should include situations where the parent undertaking is subject to Directive 2013/36/EU

or Directive 2019/2034. Investment firms within a group may not always issue

instruments which are appropriate to be used for the purpose of variable remuneration

themselves. Regulation (EU) 2019/2034 in conjunction with Regulation (EU) No

575/2013 enables Additional Tier 1 and Tier 2 instruments issued through an entity within

the scope of consolidation to form part of an investment firm´s own funds subject to

certain conditions. Therefore, it should also be possible to use such instruments for the

purpose of variable remuneration, provided that there is a clear link between the credit

quality of the investment firm using these instruments for the purpose of variable

remuneration and the credit quality of the issuer of the instrument. Such a link can usually

be assumed to be the case between a parent undertaking and a subsidiary. Instruments

other than Additional Tier 1 and Tier 2 instruments which are not issued directly by an

investment firm should also be capable of being used for variable remuneration, subject

to equivalent conditions. Instruments which are linked to reference instruments issued by

parent undertakings in third countries and which are otherwise equivalent to Additional

Tier 1 or Tier 2 instruments should be eligible to be used for the purposes of variable

remuneration if the trigger event refers to the investment firm using such a synthetic

instrument.


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(15) Investment firms that do not issue any of the instruments listed under point (j) Article

32(1) of Directive (EU) 2019/2034, should be able to use alternative arrangements,

subject to the approval of the competent authority. Such alternative arrangements should

meet the same objectives as the award of eligible instruments. The alternative

arrangement should ensure that the variable remuneration awarded is subject to implicit

risk adjustments, i.e. changes of its value in cases there is an adverse effect on the

performance of an investment firmor managed assets. Where the investment firm is

subject to the requirement to defer variable remuneration under point (l) of this Article,

the alternative arrangements should also be consistent with the requirement to defer

variable remuneration, the application of malus or claw back and the application of

retention periods to variable remuneration paid in instruments.

(16) This Regulation is based on the draft regulatory technical standards submitted by the

European Banking Authority (EBA) to the European Commission.

(17) The EBA has conducted open public consultations on the draft regulatory technical

standards on which this Regulation is based, analysed the potential related costs and

benefits and requested the opinion of the Banking Stakeholder Group established in

accordance with Article 37 of Regulation (EU) No 1093/2010 11 . The Banking

Stakeholder Group has not submitted an opinion.

HAS ADOPTED THIS REGULATION:

Article 1

Classes of instruments that adequately reflect the credit quality of an investment firm as a

going concern and are appropriate to be used for the purposes of variable remuneration

1. The following shall be the classes of instruments that satisfy the conditions laid down in point

(j)(iii) of Article 32(1) of Directive (EU) 2019/2034:

(a) classes of Additional Tier 1 instruments where those classes fulfil the conditions

referred to in paragraph 2 and Article 2, and comply with Article 5(9) and point (c) of

Article 5(13);

(b) classes of Tier 2 instruments where those classes fulfil the conditions referred to in

paragraph 2 and Article 3, and comply with Article 5;

(c) classes of instruments which can be fully converted to Common Equity Tier 1

instruments or written down and which are neither Additional Tier 1 instruments nor

Tier 2 instruments (‘Other Instruments’) in the cases referred to in Article 4 where those

classes fulfil the conditions referred to in paragraph 2 and comply with Article 5.

11 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2020, p. 12)


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2. The classes of instruments referred to in paragraph 1 shall fulfil the following conditions:

(a) instruments shall not be secured or subject to a guarantee that enhances the seniority of

the claims of the holder;

(b) where the provisions governing an instrument allow its conversion, that instrument

shall only be used for the purposes of awarding variable remuneration where the rate or

range of conversion is set at a level that ensures that the value of the instrument into

which the instrument initially awarded is converted is not higher than the value of the

instrument initially awarded at the time it was awarded as variable remuneration;

(c) the provisions governing convertible instruments which are used for the sole purpose

of variable remuneration shall ensure that the value of the instrument into which the

instrument initially awarded is converted is not higher than the value, at the time of that

conversion, of the instrument initially awarded;

(d) the provisions governing the instrument shall provide that any distributions are paid on

at least an annual basis and are paid to the holder of the instrument;

(e) instruments shall be priced at their value at the time the instrument is awarded, in

accordance with the applicable accounting standard. The valuation shall be subject to

independent review;

(f) the provisions governing the instruments issued for the sole purpose of variable

remuneration shall require a valuation to be carried out in accordance with the

applicable accounting standard in the event that the instrument is redeemed, called,

repurchased or converted.

Article 2

Conditions for classes of Additional Tier 1 instruments

Classes of Additional Tier 1 instruments shall comply with the following conditions:

(a) the provisions governing the instrument shall specify a trigger event for the purpose of

point (e)(iii) of Article 9(2) of Regulation (EU) No 2019/2033;

(b) the trigger event referred to in point (a) occurs when the Common Equity Tier 1 capital

ratio of the investment firm issuing the instrument falls below either of the following:

(i) 7% of the product of 12.5 multiplied by the own funds requirements calculated

under Article 11(1) of Regulation (EU) 2019/2033;

(ii) a level higher than specified in (i), where determined by the investment firm or

institution issuing the instrument and specified in the provisions governing the

instrument;


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(c) one of the following requirements is met:

(i) the instruments are issued for the sole purpose of being awarded as variable

remuneration and the provisions governing the instrument ensure that any

distributions are paid at a rate which is consistent with market rates for similar

instruments issued by the investment firm or by investment firms or institutions

of comparable credit quality and which in any case is, at the time the remuneration

is awarded, no higher than 8 percentage points above the annual average rate of

change for the Union published by the Commission (Eurostat) in its Harmonised

Indices of Consumer Prices published pursuant to Article 11 of Council

Regulation (EC) No 2494/95 (1). Where the instruments are awarded to staff

members who perform the predominant part of their professional activities outside

the Union and the instruments are denominated in a currency issued by a third

country, investment firms may use a similar independently-calculated index of

consumer prices produced in respect of that third country;

(ii) at the time of the award of the instruments as variable remuneration, at least 60%

of the instruments in issuance were issued other than as an award of variable

remuneration and are not held by one of the following or by any undertaking that

has close links with one of the following: the investment firm or its subsidiaries,

the parent undertaking of the investment firm or its subsidiaries, the parent

financial holding company or its subsidiaries, the mixed activity holding company

or its subsidiaries or the mixed financial holding company and its subsidiaries.

Article 3

Conditions for classes of Tier 2 instruments

Classes of Tier 2 instruments shall comply with the following conditions:

(a) at the time of the award of the instruments as variable remuneration, the remaining

period before maturity of the instruments shall be equal to or exceed the sum of the

deferral periods and retention periods that apply to variable remuneration in respect of

the award of those instruments;

(b) the provisions governing the instrument provide that, upon the occurrence of a trigger

event the principal amount of the instruments shall be written down on a permanent or

temporary basis or the instrument shall be converted to Common Equity Tier 1

instruments;

(c) the trigger event referred to in point (b) occurs where the Common Equity Tier 1 capital

ratio of the investment firm issuing the instrument falls below either of the following:

(i) 7% of the product of 12.5 multiplied by the own funds requirements calculated

under Article 11(1) of Regulation (EU) 2019/2034;


16

(ii) a level higher than specified under (i), where determined by the investment firm

or institution issuing the instrument and specified in the provisions governing the

instrument;

(d) one of the requirements in point (c) of Article 2 is met.

Article 4

Conditions for classes of Other Instruments

1. Under the conditions laid down in point (c) of Article 1(1), Other Instruments satisfy the

conditions laid down in point (j)(iii) of Article 32(1) of Directive (EU) 2019/2034 in each of the

following cases:

(a) the Other Instruments fulfil the conditions referred to in paragraph 2;

(b) the Other Instruments are linked to an Additional Tier 1 instrument or Tier 2 instrument

and fulfil the conditions referred to in paragraph 3;

(c) the Other Instruments are linked to an instrument which would be an Additional Tier 1

instrument or Tier 2 instrument but for the fact that it is issued by a parent undertaking

of the investment firm which is outside the scope of consolidation pursuant to Chapter

2 of Title II of Part One of Regulation (EU) No 575/2013 and the Other Instruments

fulfil the conditions in paragraph 4.

2. The conditions referred to in point (a) of paragraph 1 are the following:

(a) the Other Instruments shall be issued directly or through an institution or financial

institution included in the consolidation scope pursuant to Chapter 2 of Title II of Part

One of Regulation (EU) No 575/2013 or Article 7 of Regulation (EU) 2019/2034,

provided that a change to the credit quality of the issuer of the instrument can reasonably

be expected to lead to a similar change to the credit quality of the investment firm using

the Other Instruments for the purpose of variable remuneration;

(b) the provisions governing the Other Instruments do not give the holder the right to

accelerate the scheduled payment of distributions or principal other than in the case of

the insolvency or liquidation of the institution or investment firm issuing the instrument;

(c) at the time of the award of the Other Instruments as variable remuneration the remaining

period before maturity of the Other Instruments is equal to or exceeds the sum of the

deferral periods and retention periods that apply in respect of the award of those

instruments;

(d) the provisions governing the instrument provide that, upon the occurrence of a trigger

event, the principal amount of the instruments shall be written down on a permanent or

temporary basis or the instrument shall be converted to Common Equity Tier 1

instruments;


17

(e) the trigger event referred to in point (d) occurs when the Common Equity Tier 1 capital

ratio of the institution or investment firm issuing the instrument falls below either of the

following:

(i) in the case of an investment firm issuing the instrument, 7% of the product of 12.5

multiplied by the own funds requirements calculated under Article 11(1) of

Regulation (EU) 2019/2034;

(ii) in the case of an institution issuing the instrument, 7% of the Common Equity Tier

1 capital ratio of the institution issuing the instrument;

(iii) a level higher than specified under (i) or (ii), where determined by the investment

firm or institution issuing the instrument and specified in the provisions governing

the instrument;

(f) one of the requirements in point (c) of Article 2 is met.

3. The conditions referred to in point (b) of paragraph 1 are the following:

(a) the Other Instruments fulfil the conditions in points (a) to (e) of paragraph 2;

(b) the Other Instruments are linked to an Additional Tier 1 or Tier 2 instrument issued

through an entity included within the scope of consolidation pursuant to Chapter 2 of

Title II of Part One of Regulation (EU) No 575/2013 or Article 7 of Regulation (EU)

2019/2034 (the ‘reference instrument’);

(c) the reference instrument fulfils the conditions of points (c) and (f) of paragraph 2 at the

time that the instrument is awarded as variable remuneration;

(d) the value of an Other Instrument is linked to the reference instrument such that it is at

no time more than the value of the reference instrument;

(e) the value of any distributions paid after the Other Instrument has vested is linked to the

reference instrument such that distributions paid are at no time more than the value of

any distributions paid under the reference instrument;

(f) the provisions governing the Other Instruments provide that if the reference instrument

is called, converted, repurchased or redeemed within the deferral or retention period the

Other Instruments shall be linked to an equivalent reference instrument which fulfils the

conditions in this Article such that the total value of the Other Instruments does not

increase.

4. The conditions referred to in point (c) of paragraph 1 are the following:

(a) the competent authorities have determined for the purpose of Article 55 of Directive

(EU) 2019/2034 or Article 127 of Directive 2013/36/EU that the investment firm or

institution that issues the instrument to which the Other Instruments are linked is subject

to consolidated supervision by a third-country supervisory authority which is equivalent


18

to that governed by the principles set out in that Directive and the requirements of

Chapter 2 of Title II of Part One of Regulation (EU) No 575/2013;

(b) the Other Instruments fulfil the conditions referred to in points (a) and points (c) to (f)

of paragraph 3.

Article 5

Write-down, write-up and conversion procedures

1. For the purpose of point (b) of Article 3 and point (d) of Article 4(2) the provisions governing

Tier 2 instruments and Other Instruments shall comply with the procedures and timing laid down

in paragraphs 2 to 14 for calculating the Common Equity Tier 1 capital ratio and the amounts to

be written down, written up or converted. The provisions governing Additional Tier 1

instruments shall comply with the procedures laid down in paragraph 9 and point (c) of paragraph

13 in respect of amounts to be written down, written up or converted.

2. Where the provisions governing Tier 2 and Other Instruments require the instruments to be

converted into Common Equity Tier 1 instruments upon the occurrence of a trigger event, those

provisions shall specify either of the following:

(a) the rate of that conversion and a limit on the permitted amount of conversion;

(b) a range within which the instruments will convert into Common Equity Tier 1

instruments.

3. Where the provisions governing the instruments provide that their principal amount shall be

written down upon the occurrence of a trigger event, the write-down shall permanently or

temporarily reduce all the following:

(a) the claim of the holder of the instrument in the insolvency or liquidation of the

institution or investment firm issuing the instrument;

(b) the amount to be paid in the event of the call or redemption of the instrument;

(c) the distributions made on the instrument.

4. Any distributions payable after a write-down shall be based on the reduced amount of the

principal.

5. Write-down or conversion of the instruments shall, under the applicable accounting

framework, generate items that qualify as Common Equity Tier 1 items.

6. Where the investment firm or institution issuing the instrument has established that the

Common Equity Tier 1 ratio has fallen below the level that activates conversion or write-down

of the instrument, the management body or any other relevant body of the investment firm or


19

institution issuing the instrument shall be required to determine without delay that a trigger event

has occurred and there shall be an irrevocable obligation to write down or convert the instrument.

7. The aggregate amount of instruments that are required to be written down or converted upon

the occurrence of a trigger event shall be no less than the lower of the following:

(a) the amount required to fully restore the Common Equity Tier 1 ratio of the investment

firm or institution issuing the instrument to the percentage set as the trigger event in the

provisions governing the instrument;

(b) the full principal amount of the instrument.

8. Where a trigger event occurs:

(a) the investment firm shall inform the staff members who have been awarded the

instruments as variable remuneration and the persons who continue to hold such

instruments;

(b) the investment firm or institution issuing the instrument shall write down the principal

amount of the instruments, or convert the instruments into Common Equity Tier 1

instruments as soon as possible and within a maximum period of one month in

accordance with the requirements laid down in this Article.

9. Where Additional Tier 1 instruments, Tier 2 instruments and Other Instruments include an

identical trigger level, the principal amount shall be written down or converted on a pro rata basis

to all holders of such instruments which are used for the purposes of variable remuneration.

10. The amount of the instrument to be written down or converted shall be subject to independent

review. That review shall be completed as soon as possible and shall not create impediments to

write down or convert the instrument.

11. An investment firm or institution issuing instruments that convert to Common Equity Tier 1

on the occurrence of a trigger event shall be required to ensure that its authorised share capital is

at all times sufficient to convert all such convertible instruments into shares if a trigger event

occurs. The investment firm or institution shall be required to maintain at all times the necessary

prior authorisation to issue the Common Equity Tier 1 instruments into which such instruments

would convert upon the occurrence of a trigger event.

12. An investment firm or institution issuing instruments that convert to Common Equity Tier 1

on the occurrence of a trigger event shall be required to ensure that there are no procedural

impediments to that conversion by virtue of its incorporation or statutes or contractual

arrangements.

13. In order for the write-down of an instrument to be considered temporary, all of the following

conditions shall be met:

(a) write-ups shall be based on profits after the issuer of the instrument has taken a formal

decision confirming the final profits;


20

(b) any write-up of the instrument or payment of coupons on the reduced amount of the

principal shall be operated at the full discretion of the investment firm or institution

issuing the instrument subject to the constraints arising from points (c), (d) and (e) and

the investment firm or institution shall not be obliged to operate or accelerate a write-

up under specific circumstances;

(c) a write-up shall be operated on a pro rata basis among Additional Tier 1 instruments,

Tier 2 instruments and Other Instruments used for the purpose of variable remuneration

that have been subject to a write-down;

(d) the maximum amount to be attributed to the sum of the write-up of Tier 2 and Other

Instruments together with the payment of coupons on the reduced amount of the

principal shall be equal to the profit of the investment firm or institution issuing the

instrument multiplied by the amount obtained by dividing the amount determined in

point (i) by the amount determined in point (ii):

(i) the sum of the nominal amount of all Tier 2 instruments and Other Instruments of

the investment firm before write-down that have been subject to a write-down;

(ii) the sum of own funds and of the nominal amount of Other Instruments used for

the purpose of variable remuneration of the investment firm;

(e) the sum of any write-up amounts and payments of coupons on the reduced amount of

the principal shall be treated as a payment that results in a reduction of Common Equity

Tier 1 and shall:

(i) be consistent with the maintenance of a sound capital base of an investment firm

and, if applicable,

(ii) its timely exit from extraordinary public financial support and shall be limited to

a portion of net revenue when the investment firm benefits from extraordinary

public financial support.

14. For the purposes of point (d) of paragraph 13, the calculation shall be made at the moment

when the write-up is operated.

Article 6

Alternative arrangements

Alternative arrangements that may be used by investment firms for the pay out of variable

remuneration under point (k) of Article 32(1) of Directive (EU) 2019/2034 subject to the

approval of the competent authority shall comply with all of the following conditions:

(a) the alternative arrangement contributes to the alignment of the variable remuneration

with the long‐term interests of the investment firm, its creditors and clients;


21

(b) the alternative arrangement is subject to a retention policy designed to align the

incentives of the individual with the longer‐term interests of the investment firm, its

creditors and clients, the retention period shall be at least six months;

(c) the amount received under an alternative arrangement and the applicable conditions are

well documented and transparent to the staff member receiving variable remuneration

under such an arrangement;

(d) for amounts received under deferral and retention arrangements the alternative

arrangement ensures that staff cannot access, transfer or redeem the deferred part of

variable remuneration during such periods;

(e) the alternative arrangement does not foresee the increase of the value of the variable

remuneration received during deferral periods by interest payments or other similar

arrangements other than by arrangements that fulfil the conditions under point (f);

(f) where the alternative arrangement allows for predetermined changes of the value

received as variable remuneration during deferral and retention periods, based on the

performance of the investment firm or the managed assets; the following conditions

shall be met:

(i) the change of the value is based on predefined performance indicators that are

based on the credit quality of the institution or the performance of the managed

assets;

(ii) where deferral and retention have to be applied, value changes should at least be

calculated annually and at the end of the retention period;

(iii) the rate of possible positive and negative value changes should equally be based

on the level of positive or negative credit quality changes or performance

measured;

(iv) where the value change under (i) of point (f) is based on the performance of

assets managed, the percentage of value change should be limited to the

percentage of value change of the managed assets;

(v) where the value change under (i) of point (f) is based on the credit quality of the

investment firm, the percentage of value change should be limited to the

percentage of the annual total gross revenue in relation to the investment firms

total own funds;

(g) the alternative arrangement does not hinder the application of point (m) of Article 32(1)

of Directive (EU) 2019/2034.

Article 7

Entry into force


22

This Regulation shall enter into force on the twentieth day following that of its publication in the

Official Journal of the European Union. It shall apply from […]. This Regulation shall be binding

in its entirety and directly applicable in all Member States.

Done at Brussels,

For the Commission

The President

[For the Commission

On behalf of the President

[Position]

FINAL REPORT ON DRAFT RTS ON INSTRUMENTS AND ALTERNATIVE ARRANGEMENTS

FOR THE PURPOSES OF INVESTMENT FIRM’S REMUNERATION

23

4. Accompanying documents

4.1 Cost-benefit analysis / impact assessment

1. Article 10(1) of the EBA Regulation provides that before any draft regulatory technical standards

developed by the EBA are submitted to the Commission for adoption the EBA should analyse ‘the

potential related costs and benefits’. This analysis is to provide an overview of the findings regarding the

problem to be dealt with, the solutions proposed and the potential impact of these options.

A. Problem identification

1. Commission Delegated Regulation (EU) No 527/2014 of 12 March 2014 supplementing Directive

(EU) No 2013/36/EU of the European Parliament and of the Council with regard to regulatory

technical standards specifying the classes of instruments that adequately reflect the credit

quality of an institution as a going concern and are appropriate to be used for the purposes of

variable remuneration has been applicable to investment firms and credit institutions.

2. A specific framework on remuneration requirements has been created for certain investment

firms in the IFD. Investment firms to which those provisions apply must use the instruments

specified in point (j) of Article 32(1) of the IFD or alternative arrangements in point (k) of Article

32(1) of the IFD for the pay out of a part of the variable remuneration to staff whose professional

activities have a material impact on the risk profile of the investment firm or of the assets that

it manages.

3. The draft RTS have been mandated under the requirement laid down in Article 32(8) of the IFD

that requires that the EBA, in consultation with ESMA, shall develop draft regulatory technical

standards to specify the classes of instruments that satisfy the conditions set out in point (j)(iii)

of paragraph 1 and to specify possible alternative arrangements set out in point (k) of paragraph

1.

B. Policy objectives

4. The present draft RTS should, in line with the mandate in Article 32(8) of the IFD, specify the

additional Tier 1 instruments or Tier 2 instruments or Other Instruments which can be fully

converted to Common Equity Tier 1 instruments or written down, and that adequately reflect

the credit quality of the investment firm as a going concern and where an investment firm does

not issue any of the instruments referred to in point (j)(iii) of Article (32(1) of the IFD, the

alternative arrangements fulfilling the same objectives that may be approved by competent



24

authorities in derogation of point (j) of Article (32)(1) of the IFD where an investment firm does

not issue any of the instruments referred to in that point.

5. The specified instruments and alternative arrangements should ensure, together with other

remuneration requirements, that the variable remuneration of staff whose professional

activities have a material impact on the risk profile of the investment firm or of the assets that

it manages is aligned with the risk profile of the investment firm or the assets its manages.

6. The RTS should not lead, within the restrictions set by the IFD, to instruments or alternative

arrangements that are overly burdensome to create and use for the purpose of variable

remuneration and respect the principle of proportionality.

C. Baseline scenario

7. The baseline scenario for the present impact assessment is set by points (j) and (k) of Article 31

(1) of the IFD and Commission Delegated Regulation (EU) No 527/2014 of 12 March 2014

supplementing Directive (EU) No 2013/36/EU of the European Parliament and of the Council

with regard to regulatory technical standards specifying the classes of instruments that

adequately reflect the credit quality of an institution as a going concern and are appropriate to

be used for the purposes of variable remuneration that is currently applicable to investment

firms.

D. Options considered

Option 1 - Conditions for instruments under point j(iii) of Article 31 (i) of the IFD

Option A: Maintaining the provisions in the current RTS No 527/2014 of 12 March 2014.

8. No material change to the current framework would ensure that investment firms that currently

use such instruments will be able to do so also in the future and therefore no additional

implementation costs would be created. In particular, the possibility of using instruments under

certain conditions that are issued by parent undertakings limits the costs.

Option B: Setting a different framework for such instruments.

9. Given that the framework in existence has been applied since 2014, any material deviation from

existing provisions would create an additional burden for investment firms in creating

instruments. Setting softer conditions, e.g. with regard to the level of the trigger event, would

lead to an un-level playing field between investment firms and credit institutions and would lead

to challenges if instruments issued by the parent undertaking would be used for the pay out of

variable remuneration. With regard to other conditions, e.g. for the definition of write down or

conversion, the IFD refers to CRD provisions and therefore no material differentiation of

instruments compared to the instruments defined under Commission Delegated Regulation

(EU) No 527/2014 of 12 March 2014 was possible.



25

Option A has been retained

Option 2 – Conditions for alternative arrangements

10. Alternative arrangements require the approval of the competent authorities and the approval

is subject to the condition that an investment firm does not issue any of the instruments referred

to in point (j) of Article 31(1) of the IFD.

Option A: Setting conditions for alternative arrangements that ensure that they meet the same

objectives as the pay out of variable remuneration in instruments without specifying in detail the form

such an arrangement should take (e.g. financial instruments or deferred cash on frozen accounts).

11. Given the limitation that alternative arrangements can only be approved for investment firms

that do not issue any of the instruments under point (j) of Article 31 of the IFD, any requirement

to create another specific financial instrument would lead to an additional implementation

burden. Considering the nature, size and complexity of investment firms that are subject to the

specific remuneration framework under the IFD this could create material costs. Also, requiring

specific forms of deferred cash to be held on frozen accounts might be more burdensome than

other possible alternative arrangements. Given that so far no alternative arrangements have

been observed, a high level of flexibility would ensure that the implementation costs and

burdens are kept low. The regulatory objectives will be achieved by defining the conditions that

have to be met in order to ensure that the alternative arrangement is appropriate for the use of

paying out variable remuneration of identified staff. The conditions set should ensure that other

requirements such as deferral or malus can be applied, when the institution is not benefitting

from the waiver under Article 32(4) of the IFD.

Option B: Specifying other financial instruments that ensure that the alternative arrangement would

meet the same objectives as the pay out of variable remuneration in instruments.

12. As explained above, requiring specific financial instruments would increase the implementation

burden without necessarily improving the alignment of variable remuneration with risks.

Option A has been retained

E. Overall impact of the draft RTS

13. Considering that investment firms that are subject to the IFD have several instruments available

for the pay out of variable remuneration to identified staff and the available waivers that may

be implemented by Member States and given that the existing framework for the use of

Additional Tier 1 instruments or Tier 2 instruments or Other Instruments which can be fully

converted to Common Equity Tier 1 instruments or written down and that adequately reflect

the credit quality of the investment firm as a going concern has been retained and that the

requirements for alternative arrangements have been kept as flexible as possible to ensure the

objectives set in IFD, the draft RTS would create only a minor cost impact for investment firms



26

that use such instruments or arrangements for the pay out of variable remuneration for

identified staff.



27

4.2 Summary of responses to the consultation and the EBA’s analysis

Altogether the EBA received 15 responses. Eleven of these have been published and four responses

were submitted confidentially.

Given the fact that most investment firms are currently subject to a similar framework under Directive

2013/36/EU, the comments received were limited. In particular, respondents suggested that a more

proportionate framework for the award of variable remuneration in instruments should be applied.

Most comments concerned the provisions on alternative arrangements. Overall, it was felt that the

provisions relating to alternative arrangements were too prescriptive.

The IFD already allows for a high level of flexibility and leaves it to investment firms to establish which

of the eligible instruments they use for the award of variable remuneration. The instruments specified

in the RTS are only a subset of the wide range of eligible instruments defined in Article 32(1)(j) of the

IFD. Moreover, the specific IFD provisions on remuneration do not apply to small and not interconnected

investment firms. The IFD also contains waivers for the requirement to pay out variable remuneration

for smaller investment firms. Article 6 on alternative arrangements has been reviewed in order to

provide more clarity on its application.

The feedback table below contains a summary of the responses received, limited to responses received

that concern the draft RTS on instruments.



28

Comments Summary of responses received EBA analysis Amendments to the proposals

General comments

Mandatory use of instruments

Several respondents asked to consider the burden and to reduce the likelihood that firms would be forced to issue instruments to be used purely to pay out variable remuneration.

The use of instruments for the purposes of variable remuneration is a requirement under the IFD (at least 50% of the variable remuneration), unless waivers are applied in accordance with Article 32(4) of the IFD. Different types of instruments are available, as set out in point (j) of this Article. The RTS does not contain a requirement to use a specific instrument, it allows, under certain conditions, the use of already issued instruments.

Article 6 clarified

Use of different types of instruments and alternative arrangements

Article 6

Several respondents noted that a number of the provisions of Article 6 are drafted relatively prescriptively, asked for more flexibility and suggested that different types of instruments should be allowed in order to reflect the diverse legal structures of investment firms, such as shares (or equivalent ownership interests) and share-linked instruments (or equivalent non-cash instruments) and other arrangements that effectively allow aligning the interests of staff with other stakeholders’ longer-term interests, and help to align variable remuneration with the risk profile of the firm. One of them pointed out that the current provisions are too narrow because they presuppose the issuance of an equity-like instrument for remuneration purposes, which could be too burdensome especially for small firms.

Article 32(1)(j) of Directive (EU) 2019/2034 (IFD) provides for several types of instruments that can be used for the pay out of variable remuneration.

The use of alternative arrangements can only be approved in accordance with Article 32(1)(k) of the IFD where investment firms do not issue any of the other eligible instruments. If there are other instruments issued, investment firms cannot use alternative arrangements.

For many investment firms it might not be necessary to pay out any variable remuneration in instruments or under alternative arrangements, if the benefit from the waivers set down in Article 32(4) of the IFD is implemented under national law.

The criteria listed in this RTS allow competent authorities to assess whether the alternative arrangements implemented

Article 6 clarified



29


by firms are appropriate and ensure a harmonised application of requirements.

Implementation date

Many respondents suggested that it would be better to provide an option for firms to apply this RTS from the start of the accounting period/year-end, following the date of adoption of the IFR/IFD, in order mitigate the administrative burden of having to divide an administrative year in half for remuneration purposes, especially for performance-linked remuneration structures.

The provisions of the IFD should apply from 26 June 2021, including the requirement to pay out variable remuneration in instruments. The same principle applied under Directive 2013/36/EU (CRD), but the IFD provides for more flexibility in this regard. Currently, the same ‘other instruments’ are available to investment firms. The award of variable remuneration occurs after the end of the performance period under the legal framework applicable at that time.

The EBA’s mandate is limited to developing draft regulatory technical standards to specify the classes of instruments that satisfy the conditions set out in point (j)(iii) of paragraph 1 and to specify possible alternative arrangements set out in point (k) of paragraph 1. The entry into force will be determined by the publication of the RTS in the Official Journal.

No change

Responses to questions in Consultation Paper EBA/CP/2020/08

Question 1

Dividends on awarded instruments

A few respondents commented on the point that dividends or interest must not be paid on deferred remuneration in the form of instruments (recital 10). This could create a potentially significant

Investment firms should not pay out to staff any interest or dividend on instruments which have been awarded as variable remuneration during deferral periods as the staff members only become the legal owners of the instrument

No change



30


misalignment of interest with shareholders, investors or other stakeholders. The respondent suggested amendments of both the EBA’s Guidelines on the CRD IV remuneration requirements, the CRD V regime, and IFD on this point.

after vesting. For the same reason, interest and dividends payable during the deferral period should not be paid to staff after the deferral period ends. If the investment firm held the instrument during the deferral period, these payments should be treated as received and owned by the investment firm.

Award in instruments

Another respondent stated that under Article 32(1)(j)(iv) of the IFD, which states that at least 50% of variable remuneration can consist of ‘non-cash instruments which reflect the instruments of the portfolios managed’, firms are allowed to use existing fund deferral arrangements as provided for under the UCITS Directive.

The overlap in the staff identified under multiple regimes (e.g. UCITS and the new prudential regime for investment firms) requires the ability to use the same instruments to award remuneration under deferral arrangements.

This respondent further suggested that, where an investment firm has unquoted shares but the parent does have quoted shares, the latter could be used as instruments for variable remuneration.

Investment firms, unless they are small and not interconnected, have to comply with IFD remuneration requirements. Similar remuneration requirements also apply under the UCITS Directive and AIFMD. Therefore, there is a level playing field for all such firms.

The RTS only covers the mandate given to the EBA and does not set conditions for the use of shares, share linked instruments or non‐cash instruments which reflect the instruments of the portfolios managed.

Where investment firms are stock companies, it should be possible to use shares or share-linked instruments rather than using AT-1, Tier 2 or other instruments. The same applies for non‐cash instruments which reflect the instruments of the portfolios managed.

Regulation (EU) 2019/2034 in conjunction with Regulation (EU) No 575/2013 enables Additional Tier 1 and Tier 2 instruments issued through an entity within the scope of consolidation to form part of an investment firm´s own

No change



31


funds subject to certain conditions. Therefore, it should also be possible to use such AT-1 and Tier-2 instruments for the purpose of variable remuneration, provided that there is a clear link between the credit quality of the investment firm using these instruments for the purpose of variable remuneration and the credit quality of the issuer of the instrument.

Article 1

Classes of instruments that adequately reflect the credit quality of an institution as a going concern and are appropriate to be used for the purposes of variable remuneration

One respondent asked whether the review under Article 1 point 2(e) is intended to be annual, in line with variable remuneration being awarded, such a frequency would be too burdensome. The respondent suggested the introduction of a de minimis threshold based on total assets.

The review should be done every time there is a new award of variable of remuneration partly paid out in such instruments. This is necessary to ensure that the intended value of remuneration is awarded.

Current remuneration practices show that in most cases different instruments (e.g. share linked instruments) are used for remuneration awards. Where AT-1 or Tier-2 instruments are awarded, in many cases a market price is available.

No change

Article 4

Conditions for classes of Other Instruments

One respondent argued Article 4 point 2(a) is too burdensome for unlisted firms with total assets of over EUR 100 million for three reasons: 1) a credit rating for the underlying firms issuing the instruments and a requirement for them to be independently assessed; 2) triggering event provisions (paragraph 2

The IFD requires the EBA to develop draft RTS to ensure that instruments are appropriate to be used for the purposes of variable remuneration, that they can be fully converted or written down and in each case adequately reflect the credit quality of the investment firm as a going concern.

No change



32


of Article 4); and 3) periodic independent review required under point (e) of paragraph 2 of Article 1.

This respondent also proposed to create a threshold of total assets at a higher level for the application of these conditions, so that the conditions apply in a proportionate manner.

Finally, this respondent also noted that a significant number of investment firms currently do not have and do not need a credit rating, other than for the purposes of this regulation, raising cost-benefit issues.

The threshold is established in the IFD. Article 32(5) allows Member States to increase the threshold under certain conditions.

It must also be considered that investment firms may additionally use other instruments for awarding variable remuneration.

The draft RTS does not require that a credit rating be provided by a rating agency. As explained in the consultation paper, the draft RTS uses the term ‘credit quality’, which may be measured by different means, e.g. using a rating, spreads or capital ratios.

Question 2

Redemption period

One respondent suggested that, according to Articles 52 and 63 of the CRR, one of the conditions that needs to be met for instruments to be regarded as good capital from a Tier 1 or Tier 2 perspective is a redemption period of no less than 5 years. Allowing small investment firms a 3-year deferral of variable remuneration, for instruments held, would breach this condition unless the deferral is extended to 5 years. The respondent suggested avoiding such a mismatch so that a 3-year redemption is applied.

The EBA is not empowered to change the provisions regarding the redemption period for AT1 or AT2 instruments and their eligibility as own funds instruments.

It is possible to use such instruments also for the award of variable remuneration with a deferral period of less than 5 years. Staff could, after the vesting and retention periods, sell the instruments received.

No change

Question 3



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Carried interest

One respondent was concerned that some remuneration arrangements, in particular carried interest arrangements, while invariably designed to contribute to the alignment of variable remuneration with the risk profile of the firm, would not be considered acceptable under the new regulation because of the number and prescriptiveness of the provisions in the draft Article 6, and requested a shorter, more principles-based, set of criteria.

Carried interest within the meaning of Article 4(1)(d) of Directive 2011/61/EU is considered to be remuneration and is subject to the IFD remuneration requirements including the pay out in instruments. During deferral periods, staff do not own the instrument and therefore do not receive interest payments. Interest payments during such periods would also reduce the risk alignment and contradict the principle that variable remuneration should not vest faster than on a pro rata basis.

In any case, alternative arrangements can only be approved if no other instruments listed under point (j) of Article 32(1) of the IFD are issued.

No change

Article 6


One respondent considered that the conditions set out in draft Article 6 are too narrow, because they assume the issuance of an equity-like instrument, in that they contemplate deferral and retention of the amounts of variable remuneration received (which is duplicative of the independent requirement in Article 32(1)(l) of the IFD), and specify a minimum retention period of at least six months. Article 6 assumes that value will be measured annually, prohibits growth in value, and prohibits the transfer of the part of variable remuneration paid in instruments. Consequently, the respondent suggested removing Articles 6(b), 6(d), 6(e), 6(f) and 6(g)(ii)(iv) and (v).

Article 6 does not require an equity like instrument. On the contrary, if another eligible instrument would be issued, no alternative arrangements can be approved by the competent authority.

An alternative arrangement should in the same way lead to a risk alignment of the variable remuneration as an award in instruments. Therefore, similar conditions need to be applied, e.g. to deferred cash that is kept on a specific account and can only be paid out after a fictive retention period has passed after vesting.

Article 6 clarified



34


Article 6


One respondent considered it would be useful to provide concrete examples of alternative arrangements where an investment firm does not issue any of the listed instruments in Article 32(1) and does not manage assets. For instance, they asked about the possibility of using an instrument that is partially indexed to the financial result of the parent company.

The mandated RTS will, after adoption, be directly applicable, examples cannot be provided in the RTS. Please refer to the above for one example of an alternative arrangement.

No change

Article 6


One respondent suggested that the EBA could grant national competent authorities the right to provide blanket consent for the use of alternative arrangements where the variable remuneration reflects the performance of assets managed by the firm without the firm being required to obtain individual approval for such arrangements from their national competent authorities.

The RTS only sets out the conditions for such alternative arrangements, but not the process in which they can be approved.

A general approval of certain arrangements by competent authorities would be possible, if the national law allows for this. As explained in recital 15 and set out in point (k) of Article 32(1) of the IFD, such arrangements can only be used by investment firms that do not issue any of the instruments listed under point (j) of Article 32(1) of the IFD.

No change

Article 6(a) One respondent suggested adding ‘…to the alignment of the variable remuneration with the risk profile of the investment firm and/or its clients.’

The comment has been accommodated and the text has been aligned with Article 32(3) of the IFD. ‘… longer‐term interests of the investment firm, its creditors and clients.’

Article 6 amended

Article 6 (b)

One respondent pointed out that deferrals do not apply for every investment firm and there are exemptions set down in the IFD/IFR based on thresholds, and therefore this cannot be a criterion applying for every firm.

The IFD establishes that the remuneration practices and, in particular, the variable remuneration should be aligned with the risk profile of the investment firm or the assets it manages. Point (b) of Article 6 has been amended.

Article 6 amended



35


Another respondent considered that is was not necessary for Article 6 to reference the operation of deferral and retention, as this is a matter covered by the IFD itself, and these references in the RTS would appear to risk further restricting the degree of flexibility that is intended to be afforded by the concept of alternative instruments.

Where waivers are applied, investment firms will likely benefit from both, a waiver of the deferral requirement and a waiver of the requirement of paying variable remuneration in instruments. However, there are situations where an investment firm is subject to the deferral requirement but has not issued any of the instruments under point (j) of Article 32(1) of the IFD.

Article 6 (e)

One respondent requested more guidance on the scenarios where a retention period longer than 6 months would be expected to be used and how long it would be likely to be considered appropriate in these circumstances, favouring an approach whereby firms are able to establish their own longer retention periods based on their individual circumstances, risk horizon and the way in which their compensation is calculated.

An alternative arrangement should in the same way as instruments under point (j) of Article 32(1) IFD lead to an alignment with the longer‐term interests of the investment firm, its creditors and clients. The 6-month period is a minimum period. Depending on the business cycle, longer deferral or retention periods than the minimum periods may be appropriate for some identified staff or in general. The EBA is due to issue guidelines on remuneration policies under the IFD that provide further clarity on the application of remuneration requirements.

No change

Article 6(g)

Several respondents considered items (iv) and (v) of this article too prescriptive, and some directly requested their removal. They see a need for improvement related to the proposed alternative arrangements based on the performance of the managed assets or the investment firm. They considered that limiting the performance-based variable remuneration to the percentage of value change of the managed assets or to the percentage of

The provisions allow investment firms to define approaches within the alternative arrangements that allow them to change the value of remuneration. This is equivalent to price changes of instruments awarded. Such approaches are not mandatory but contribute to the risk alignment of variable remuneration that must be achieved. However, where such approaches are applied, certain conditions must be met. Such conditions do not limit the requirement regarding the application of malus or claw-back.

Article 6 has been clarified



36


value of net revenue in relation to the investment firms total own funds would affect the investment firm’s ability to reduce remuneration at times of reduced revenues, leading in turn to risks to the investment firm’s ability to withstand times of economic downturn or reduced revenues.

Article 6(g)

Two respondents considered Article 6(g)(i) to be too restrictive and that because of the different types of investment firms the definition of ‘credit quality’ is inappropriate and should be replaced by ‘risk profile’ in Articles 6(g)(i) and 6(g)(v) as in Article 6 (a). Another option suggested was to create a new paragraph (vi) to add criteria based on the financial result, or directly removing item (i).

The wording of the RTS is consistent with the wording used under the IFD. As explained above, credit quality can be measured using different approaches. The approach taken allows for a high level of flexibility.

The provisions have been clarified

Question 4

Impact assessment

Several respondents pointed out that the implementation of new provisions relating to instruments are likely to significantly increase the administrative burden for investment firms which are currently not covered by the remuneration requirements of the CRD, and the administrative resource requirements for multiple disciplines as consequence of new requirements such as additional requirements for deferral administration systems, separated allocation processes during year-end

Currently, investment firms are subject to the CRD and the

corresponding RTS on instruments. New requirements are

only added to the RTS with regard to alternative

arrangements.

The remuneration requirements under the IFD apply to

investment firms unless they are small and not

interconnected in accordance with Article 25 of Directive

(EU) 2019/2034.

No change



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compensation cycles and extensive internal communication activities.

The legislator has already assessed the impact of the IFD on

investment firms. It should be mentioned that the legislator

has also established several waivers under specific

conditions in accordance with Article 32 (4) of the IFD to

reduce the regulatory burden.

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